Financial Planning Blog

In Part 2 of this series the advantages of waiting to claim Social Security benefits was examined. (Part 1 explained the basics about how the decision of when to take one's benefit affects the size of the benefit.) There are two key takeaways from this discussion. First, don't rush to take your benefits early-it may be in your and your spouse's best interest to wait. Second, Social Security retirement benefits are a complex topic, and making the most of them takes considerable understanding.

Before you rush to the conclusion that everyone should wait until age 70, or at least their FRA (full retirement age) before starting, let's look at some situations where it makes good economic sense to take Social Security retirement benefits earlier, rather than later.

You have no other income source: Sadly, this is the situation of some retirees. They cannot work, and have no savings or other source of income. In this case, it is a matter of survival, not long term economics. However, a willingness to save in earlier years and/or willingness to continue working should go a long way to preventing these circumstances for those that are relatively healthy.

Shorter than average life expectancy: If you are a single individual with a shorter than average life expectancy, than it makes reasonable sense to take your retirement benefit early-say at the earliest age of 62. (At age 62, the average life expectancy of a male is about 19 years, or age 81. For a female, it is about 22 years, or age 84.) Although your benefit is reduced, you will receive it for a several additional years. If you expect to die before average life expectancy, the expected present value of your benefits will be higher than if you waited until your FRA or age 70. If you end up actually living beyond average life expectancy, however, the value of your benefits will be less than if you waited and taken benefits later. A couple of important caveats:

• If you are affected by the earnings test than it probably makes sense to delay taking your benefits until you stop working or until you reach FRA and are no longer subject to the earnings test. Losing $1 for every $2 earned over the earning test limit ($14,160 in 2010) is a big hit to take if you make a significant income. The SSA will recalculate your monthly benefit at FRA to compensate for the earlier reductions, but it will likely take some years before you get those lost benefits back.
• If you are married and you have a significantly higher earned benefit than your spouse, than it doesn't necessarily matter what your life expectancy is. What matters is the combined life expectancy of you and your spouse. If your spouse has an average or better life expectancy, than it is generally in her (or his) best interest if you wait until age 70, maximizing your benefit and your spouse's survivor benefit.

Coordinating survivor benefits with your own benefit: If your spouse has predeceased you and you are eligible for both survivor benefits and your own earned benefit, you have some unique opportunities to claim one benefit early and switching to a higher benefit at a later time. One strategy would be to take your own reduced benefit at age 62, and then switch to a higher survivor benefit at your full retirement age. Depending on the relative size of each benefit, a potentially better strategy would be to claim the survivor benefit as early as age 60. When you reach age 70, you switch to your own benefit which is higher, having grown substantially due to the delayed retirement credits. (See this Kiplinger's article for some examples.)

Spouse with the lower benefit claiming early: Economists generally believe it is in the best interest of married couples to have the higher earning spouse wait until age 69 or 70 in order to maximize the survivor benefit. (This is discussed more fully in Part 2.) However, the overall wealth of the couple may well be maximized by having the lower earning spouse take benefits as early as 62. When the lower earning spouse is younger and has a longer life expectancy (a common scenario is a higher earning husband and lower earning, younger wife) the rationale for the lower earner to take benefits at 62 is strong. This is because the wife is only expecting to receive her (reduced) benefit for as long as her older husband lives, and then she will start receiving her husband's benefit (i.e. the survivor benefit) that has been maximized with delayed retirement credits. A study from the Center for Retirement Research at Boston College recommended that a lower earning wife should usually start benefits at age 62 if her earned benefit (primary insurance amount or PIA) was greater than 40% of her husband's PIA, or if her benefit was at least 30% of his and she was at least 3 years younger, or in all cases if she is at least five years younger than him. A couple of important caveats:

• Taking the early benefit assumes it will not be significantly reduced by the earnings test. (See above.)
• In the case of a wife who does not have her own earned benefit, she must wait until her husband retires and claims his benefit before she can receive a spousal benefit, which is equal to 50% of her husband's. (This works both ways-a husband can get a spousal benefit off his wife's work record.) However, once her husband is at his full retirement age (FRA) he can "claim and suspend". In other words, he claims his benefit, but immediately suspends taking it. This strategy enables the wife to receive her spousal benefit, but also allows the husband to continue earning delayed retirement credits until age 70.

These are not the only situations where a person may wish to start taking your retirement benefits prior to full retirement age, or age 70 where their earned benefit could be maximized. In Part 4, we will look at additional strategies for effectively utilizing the spousal benefit and the opportunity to take your benefit early and pay it back later to Social Security-interest free.